Letter to the Washington Post:

Max Stier (June 8th: “The Flow-Chart Fallacy”) is half right. We don’t need to reorganize and layer the regulatory communities around food safety and the financial system. We’ve had our Katrina on Wall Street. Building a bigger financial regulatory structure won’t prevent another dangerous recession, just as creating the Department of Homeland Security certainly didn’t help with hurricane recovery.

But improving the leadership of the regulatory community won’t help if a future Administration’s policy is to turn a blind eye to abuses, or if agency budgets are continually reduced. And useful measurement tools won’t correct the fundamental flaw of regulation: Regulations are great for controlling old problems, but they seldom if ever prevent new problems from emerging or control them when they do.

We need some fundamental changes to “the way the game is played” in capitalism, akin to those that restrained monopolies a century ago. Surely the maintaining the health of the financial system today is at least as important as restraining Standard Oil was then.

I have two suggestions for starters. First, I would limit the market share of any bank, hedge fund, etc., so that individual failures would not threaten the overall system. We’ve had banks get bigger, not smaller, since last year. And of course I’d reinstate Glass-Steagall (1933) in a Wall Street minute!

Second, I would mandate that large financial entities be licensed and managed as “limited liability partnerships” rather than corporations. (A hybrid form to include shareholders is not beyond the imagination of policy-makers and law school professors.)

Such an entity would require that the senior staff, those making more than, say, $1 million per year in salary and bonus combined, would be personally liable for any losses and any damages and remain so for a period of perhaps ten years after leaving the firm.

Rather than fight a losing battle over executive pay caps, I’d like to see the Masters of the Universe have some “skin in the game.” A lot of skin.